Lead Story

Services Done, Indian IT Products Need Indian Money To Fly

Neither the Indian capitalist class nor India’s large companies are investing adequately in innovation

Fire That Needs Rekindling

When new economy took shape, india bangalored the world. No major tech company or start-up can now imagine a digital market without involving India. but, india is split between staying course with domination in services or investing in creating products. how the it sector clears this dilemma will decide how the world engages India next


India’s information technology (IT) industry has grown spectacularly since the 1990s and is possibly the largest industry today in terms of revenue. In 2022, it exported $178 bn worth of software with a total industry value of $227 billion. By March 2025, IT exports are expected to reach $230–250 bn with the industry value at $325–350 bn. The value addition of IT services for exports is more than 70%.

Consequently, the sector extensively impacts India’s growth, ability to generate high-quality and high-wage employment, tax generation and growing forex needs. It employs 5.1 mn people in software exports, having hired over five lakh people last year. In the current year, net IT exports, in terms of overseas currencies coming into India, is expected to total $100–115 bn. Along with remittances of $80–90 bn, India’s total inflow of currency via the export of services is expected to cross $200 bn.

The world is amidst a digital revolution, with more than 5.5 bn of the 7.8 bn global population having a mobile phone and 5 bn accessing the internet. Low-cost devices, coupled with inexpensive data plans, have vastly improved accessibility. The internet has become a platform for commerce, education, entertainment, health services, financial services and government relief disbursal. The industrial-era model of a physical global supply chain is now giving way to a digital supply chain, transforming business and delivery models worldwide.

Amid the massive growth of the internet, the world is seeing the rise of 5G architectures increasing the speed of transactions and downloads, artificial intelligence (AI) for software solutions and apps, quantum computing, which will shortly drive up computing and processing speeds multifold, machine learning (ML) and robotics, which will offload a great deal of manual work to algorithms and robots, and a greater degree of automation, which will increase productivity all around.

Most of these advancements are being driven by the IT industry in India, as 60% of global outsourcing comes to India. Over 450 global Fortune 500 companies have a presence in India where their IT-related work is processed.

The Indian IT sector is transforming itself from being the provider of routine services to the harbinger of innovation and app-based services. Much of the work undertaken in India is critical to the global digital revolution. For example, Bengaluru has over three lakh chip designers and testers in over 300 companies, amounting to the highest concentration of chip testers and designers worldwide.

The sector has been quietly transforming itself over the last decade and provides an umbrella of services from routine maintenance and infrastructure support to software applications, digital services and R&D. It has been able to do this because of outstanding project management skills and the ability to quickly train a massive number of its workforce at a reasonable cost. Press reports suggest more than 40% of its 5.1-million-strong workforce is trained in AI and ML.

Over the next three years, India expects to add two million employees to its IT industry, which will drive employment, growth and taxes.

However, India’s current paucity of software product companies is a significant growth area that needs investment. Software products, as opposed to services, can generate more value add and enable India to become a more dominant digital power.

Today, the largest and most profitable software product companies originate in the US. A vibrant software products ecosystem requires a massive user base, a sizeable local economy where products can be sold profitably, extensive pools of investable risk capital, mature marketing mechanisms and, above all, a culture that fosters innovation, R&D and technology development—all of which are abundant in the US. While the US market is north of $1 tn, India’s domestic software market is merely $30 bn.

The capital availability in India pales in comparison to the US. While $112 bn entered India’s start-up ecosystem between 2014 and 2021, not more than 10% of it was domestic in origin. Neither the Indian capitalist class nor India’s large companies are investing adequately in innovation. There are positive signs of improvement in the last half a decade with the advent of Jio, Tata’s move to create an app-based innovative culture and many companies adopting technology deeply, particularly with the post-pandemic behavioural bias towards digital solutions.

Indian software product companies are not as visible in the global landscape as the US companies, like Google, Facebook, Salesforce, Amazon, Oracle and others, are, because they do not have the benefit of a sizeable local market and adequate growth capital like in the US. This is not because of a lack of technological prowess. Barring SAP, there are no major software product companies in Europe. Barring a few gaming companies in Japan and Korea, that region too lacks big software product companies. However, Chinese companies like Tencent, Alibaba, ByteDance, etc. are massive, have a significant local user base and are now having a global impact.

Indian start-ups too are increasingly creating waves globally. India hosts over 75,000 start-ups with a cumulative value of around $500 billion. The nation hosts the third-largest start-up ecosystem in the world and ranks third in the number of unicorns as well—currently standing at 108. It is on track to host over one lakh start-ups, 250 unicorns and a cumulative ecosystem value closer to $1 tn by 2025.

The year 2021 marked a record year for tech IPOs. But, many of these listed companies are now quoting less than the issue price, which is a product of high pricing, a lack of communication with investors and post-IPO performance not meeting investor expectations. This condition may prove to be a short-term blip in the long-awaited journey of Indian start-ups towards public markets. The public markets in India and globally have recognised that Indian companies are innovative and demonstrate high growth but also consume capital.

The biggest barrier to the growth of innovative companies is inadequate capital, which is doubly tragic, given the large pool of investable capital available with India’s insurance giants. While these insurance companies cumulatively manage more than Rs 50 tn of savings, their investment into the country’s rising growth engine of software product companies is trifling. Though historical regulatory constraints were removed in the recent past, the investment is yet to be directed in these companies. Even an annual investment of 0.5% of the approximate Rs 5-plus tn new yearly investments will go a considerable way in ensuring higher returns for the insurance company and increased capital flow into the innovation ecosystem.

Other long-term players like mutual funds and institutional capital also lag in investing in these companies. Insurance companies and sovereign funds of Canada, the US, Singapore, Japan and other nations have invested considerable sums in the Indian growth story due to the higher rate of returns it offers. It is a pity that Indian capital does not recognise the potential of this growth engine.

To increase the velocity of growth of Indian software product companies, the pool of domestic capital must increase. India now requires a further Rs 50,000 crore infusion—between the government, financial institutions and insurance companies—over the next five years to build on this value proposition and build a strong segment for software.

The Indian IT sector will continue to be a key growth engine for India over the next 25 years. With sufficient domestic capital influx, it can consolidate its potential as one of the top three digital powers and build on its legacy of IT services to become a leading provider of software products to the world.

With Nisha Holla, a technology fellow at C-CAMP

T.V. Mohandas Pai, Chairman, 3one4 Capital, Aarin Capital and Manipal Global Education